UK banks are bracing for tax increases when Chancellor John Healey announces the Budget in two weeks, according to senior banking executives who spoke to the BBC.
Healey has refused to rule out additional taxes on the sector despite calling banks "crown jewels" of the UK economy. The country's four largest banks generated around £15bn in profit during the first six months of this year, prompting calls from trade unions for higher taxes.
Banks currently face a 3% surcharge on top of the standard 25% corporation tax rate, plus a separate levy on balance sheet assets. Together, these generated £2.6bn for the Treasury last year (the surcharge contributed £1.2bn and the bank levy £1.4bn). The sector contributed nearly £40bn total to government coffers when employee income tax is included.
The BBC outlines several options the chancellor could pursue. He could raise the 3% surcharge back to its previous 8% level, a move that could yield around £2bn annually. This rate was cut by the previous government when corporation tax was raised from 19% to 25%. Alternatively, he could increase the bank levy, which currently charges 0.1% on short-term loans and 0.05% on longer-dated obligations, excluding mortgages.
A third option under discussion involves restricting banks' ability to offset historical losses against current profits. Lloyds has benefited substantially from this practice using losses dating to the financial crisis. A temporary moratorium could generate an estimated £1bn per year while being "a lot more bearable," according to one bank executive quoted in the reporting.
The banking industry trade body UK Finance warned that further tax increases would "weaken competitiveness, discourage investment and job creation, and work against the government's ambition to deliver growth."
Banks note they were surprised to escape tax increases at the last Budget despite elevated profits. Rising interest rates have expanded lending margins, boosting profitability. However, industry leaders caution that tax increases targeting UK banks while exempting foreign operations in Britain would contradict the government's stated commitment to supporting British business. JPMorgan chief executive Jamie Dimon has warned that the UK already imposes one of the world's highest tax burdens on banks.